Five ABC Compliance Lessons from Samsung Chief's Arrest

21 February 2017 2:23pm

The head of Samsung Group has been arrested in
South Korea because of major bribery allegations. The details of the
allegations offer some important lessons to companies about the importance of
compliance to help prevent and mitigate bribery and corruption risk.

Allegations Emphasize Bribery and Corruption Risk

Lee Jae-yong was arrested last
week on suspicion of bribery, embezzlement, perjury, moving assets abroad
illegally and concealing evidence of criminal profit. South Korea's special
prosecutor's office accuses him of bribing a close friend of the country's
president. Mr. Lee allegedly paid $37
million to organisations linked to Choi Soon-sil, who is currently under
detention related to abuse of power and attempted fraud charges—a scandal that
also led to impeachment proceedings against President Park. Prosecutors allege
that the payments were made to secure regulatory approval for a merger of two
Samsung units in 2015 and smooth his succession to the head of Samsung.

At the time of writing, the investigation is ongoing,
but the allegations offer some useful lessons for companies considering how to
mitigate the risk of bribery and corruption:

1) Bribery allegations can damage reputation and
share price

The reaction to the news of Mr. Lee's arrest has already affected the company's reputation and financial performance. Samsung's
share price on the Nikkei 225 market dropped by 1.2
percent on the night that the news was announced. It had already been a
difficult six months for Samsung, following the smartphone recall due to
battery-related fires. Samsung's shareholders are unlikely to feel confident in
the company's preparations for its next product launch while it is
simultaneously facing bribery charges.

2) Beware associations with PEPs

The allegations are a timely reminder of the
risks of companies having links to Politically-Exposed Persons (PEPs). A PEP's
position of influence means that they can be targets for bribery, money
laundering and terrorist financing. When a company is considering doing
business with a PEP, they should first check the laws around PEPs in their
country, as well as countries in which they conduct business. As we noted a few
weeks ago, some anti-bribery and corruption laws—like the Foreign Corrupt
Practices Act (FCPA)—have considerable extraterritorial reach. Then they should carry out PEP screening and
further enhanced due diligence on a PEP and their business interests relative
to the level of risk.

3) Compliance culture comes from the top

Implementing
compliance policies, processes and systems is an important part of
mitigating bribery and corruption risk, however, the leadership sets the tone.
Companies must ensure that board members, the C-suite and other top-level
management present a united front against corrupt practices and expect
transparency and accountability at every level of the business. Sending mixed
messages erodes confidence and makes whistleblowers less likely to come forward
about questionable practices—increasing companies' vulnerability to
reputational, regulatory, financial and strategic risk.

4) A strong compliance culture offers competitive
advantages

The allegations against Samsung are part of wider
corruption charges against South Korea's
president. The country's parliament voted to impeach President Park in
December, and if a court upholds the decision an election will be held this
year. Perhaps because of these allegations, the country's score on Transparency
International's Corruption Perceptions Index
(CPI) has fallen from 56 in 2015 to 53 in 2016. Until these allegations are
resolved, companies should increase their due diligence on entities with links
to South Korea.

By contrast, Singapore was the best performing
Asian state in last year's CPI with a score of 84. Last year, a report by
ethiXbase found that Singapore's tough stance on corruption in the private and
public sector has given it "a significant competitive advantage over its
neighbours." Moreover, the Organisation
for Economic Cooperation and Development (OECD)
estimates that corruption typically equates to 10 percent of the value of a
contract or transaction, which means companies must work that much harder to
make a profit. Add in negative consumer
responses, declines in stock values, and potential multi-million dollar fines
and criminal charges, and the lesson for countries and companies is clear: Implementing
effective anti-corruption measures and developing a reputation for integrity protects
your interests and leads to financial rewards because the country or company is
seen as a safer and more attractive place to invest.

5) It (usually) isn't too late to turn around a
compliance culture

Were Samsung's executives and shareholders not
already aware of the costs of being associated with bribery and corruption
allegations, they are now. This could provide the company with an opportunity
to overhaul and strengthen its compliance culture and systems. Daniel Gleeson,
a senior analyst at Ovum, says this is
"the opportune moment" for Samsung. He says Samsung's internal systems will
likely come under greater scrutiny, and regulators and investors may push for a
radical overhaul of the company's corporate structure.